By taking advantage of these gift options, you can support and contribute to the well-being and education of your loved ones without worrying about any tax implications.

Annual Exclusion Gifts

These are simply gifts of money or property that fall below a certain value.  For the year 2023, the value is set at $17,000 per person.  So you can give up to $17,000 to as many people as you want without having to worry about gift taxes.  If you’re married, you and your spouse can even double the advantage and gift up to $34,000.

The good news is that the IRS doesn’t consider these gifts as taxable, meaning you don’t have to report them on your federal gift tax return.

However, if your gifts exceed the annual exclusion amount or don’t meet the requirements, you may need to file a gift tax return.  There are also special situations where you need to file a gift tax return, so consult with an estate planning attorney to be sure.

Medical Exclusion Gifts

Paying for someone’s medical expenses directly to the provider or insurance company can quality for medical exclusion.  The IRS doesn’t consider these payments as gifts for gift tax purposes. This means that in 2023, if you pay for your grandchild’s medical expenses, you can still give them an additional $17,000 without having to worry about filing any gift tax returns.

The types of medical expenses that qualify for this exclusion are generally the same ones that can be deducted for federal income tax purposes.

Also, take note of these important requirements:

Pay the person or institution that provided the medical care directly.  Otherwise, the payment will be seen as a gift to that individual and not as payment for a qualified medical expense.

The amount you pay must not have already been reimbursed by the individual’s insurance company.  If any portion of the expense has been reimbursed, that reimbursed amount is not eligible for the unlimited medical exclusion from the gift tax.  Instead, it will be treated as if it was given on the date the individual received the reimbursement.

Educational Exclusion Gifts

Similar to the medical exclusion gift , paying for someone’s educational expenses, such as their college tuition, qualifies for the education exclusion.  The IRS does not consider it to be a gift for gift tax purposes.

For the payment to qualify, you also needs to meet 2 critical requirement:

Pay the institution providing the education rather than to the individual receiving the education.

The payment must be for tuition only.  It does not apply to miscellaneous expenses such as dormitory fees, books, and other similar education-related expenses.

Minimize the Impact on your Tax Liability

Providing financial assistance through these gift options can help you care for your family and minimize tax liability.  If you have any inquiries regarding the process of giving monetary or property gifts to your family, please do not hesitate to contact your estate planning attorney or tax consultant.

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The Texas Constitution Article I, §26 adopts the common law version of the Rule Against Perpetuities.  In 2021, the Texas Legislature made extensive revisions to Texas Property Code §112.036 that may extend the time period to 300 years from the effective date of a trust.  This was done to permit the creation of dynasty trusts in Texas.  Previously, the rule had stated property must transfer or vest within 21 years after some life in being at the time the interest was created, plus a period of gestation. 

The effective date of a trust is the date it becomes irrevocable, meaning the date the person setting up the trust dies or declares the trust is irrevocable.  This date is important because it is the date the interest in property is created and the time period subject to the Rule Against Perpetuities begins.  Thus, if grandfather’s trust states the property is to not be sold, but held in trust for grandson during grandson’s life, the maximum duration of the trust was the grandson’s life, plus 21 years.  If grandson had not been born, but was in gestation, then the period could be the grandson’s life, plus 21 years and an additional 9 months (gestation).  Now if that isn’t a complicated enough set of terms, imagine that the Texas Property Code now says that period maybe 300 years.  Article I, §26 of the Texas Constitution hasn’t changed.  So, the time period might be 300 years or the person’s lifetime plus 21 years.  

Head swimming yet?

Dynasty trust isan irrevocable trust that lets people keep wealth in the family for multiple generations.  Families can reduce the tax burden on successive generations of beneficiaries.  Now mind you, the current estate tax exempts the first 22 million dollars of a couple’s assets from estate tax.  So unless you are a professional sports athlete, politician or super rich, then this may not be an issue. 

It will be interesting to watch the legal battles over the issue of the Rule Against Perpetuities versus the Texas Property Code, but lawyers have certainly found a way to insure they will have work.  Not only will they have work, they will certainly be able to charge a high fee to their super rich clients. 

If you are thinking of leaving property to your family and want to protect the value of that property from taxation or make it a simple process to transfer those assets, you should seek the assistance of an attorney with experience in estate planning.  A little spent now, will save money and headaches for your family later.  If you are a professional athlete, politician or super rich, I would be glad to set up a retainer.  

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C.  He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.  www.moakandmoak.com

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While these are just bills that have been proposed in Washington, those of us that remember the old School House Rock “How a Bill Becomes a Law” cartoon, know how real this change is. Right now under current law, there is a lifetime exemption of $11.7 million for a single person and $23.4 million for a couple. This means if the gross estate value is less than the lifetime exemption, no tax would be owed. However, the 99.5% Act would change the estate tax exemption to $3.5 million per person and $7 million per couple.

If you own a business, real estate or a farm or ranch, this will likely effect your estate. When you consider the value of a business, real estate, house, equipment, investment or savings accounts, vehicles and cattle, it does not take long to reach $3.5 million. 

Additionally, the 99.5% Act would increase the tax rate of the federal estate tax. Currently, the estate tax rate is set at 40%. Under the 99.5% Act there would be a phased increase up to 65% depending on the value of the estate.

While the estate tax change proposed may only affect those with large estates, the STEP Act proposed would affect everyone. Senator Chris Van Hollen has proposed to eliminate the stepped up basis, a concept under capital gains taxes. Capital gains taxes are due when a person sells an asset that appreciated or increased in value since it was purchased. For example, if a person purchased a tract of land in 1970 for $25,000 and later sells it for $125,000, capital gains tax would be owed on the $100,000 increase in value. That would be a $20,000 tax. 

Right now, under our current laws, if you sell an appreciated asset, capital gains taxes are paid on the increase or gain of value. This is true whether the asset be baseball cards, stocks or real estate. It becomes a major issue for real estate because of the rapid increase in real estate values.

The benefit of a stepped up basis is that when an asset is inherited the original cost basis may be stepped up to the value of the asset at death, rather than the original purchase price, if an appraisal is obtained. So, in the example above, the $100,000 gain would be wiped out because the new basis would be the appraised value. That represents a significant savings.

When applied to family farms and ranches, this can be a huge savings because most people in agriculture are in it for generations, the farm or ranch having been purchased years ago for as little as $10 per acre. Without the step up in basis, the capital gains tax would be massive when sold.

It is important to note the STEP Act would also impose capital gains taxes on unrealized gains at a person’s death. Currently, a person does not owe capital gains tax until an asset is sold. The STEP Act would change this to impose capital gains taxes when assets are transferred at death.

These proposed bills would not only impact agriculture, but also processors and small businesses across the country. If you own real estate, have an agriculture related business, a small business, home, vehicles, equipment, investments and savings, then you should review your estate plan (i.e., Last Will and Testament and powers of attorney).

The Agricultural and Food Policy Center (AFPC) at Texas A&M University is conducting a study on the impact of these proposed acts, the Economic Impacts of the Sensible Taxation and Equity Promotion Act. Contact Texas A&M University and your congressman to object to these proposals. Now is the time to be vocal and heard. 

You should talk to a professional who can guide you and help you formulate a strategy if these proposed bills become law. To help you get the insight and planning you need to help you, please come and see us now, because planning can take time to implement. 

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C. He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.

www.moakandmoak.com

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